As I stated in the overview for this series, in this first post I will share what I have observed are the key foundational views of money on which Dave Ramsey’s entire program is based, the underlying principles. If you disagree with any one of these views, DR’s program is either not for you or you will want to make some modifications to follow it successfully.

You Want to Plug in to a Simple, Universal Program

DR’s Baby Steps are a one-size-fits-all plan that anyone can jump into and execute without concern for nuances. After making the decision to follow DR’s program, the only remaining decisions are precisely how to manage your money in order to accomplish the steps. While that is no mean feat, the fact that all the difficult high-level decisions are made for you by DR makes this program very attractive for a certain type of person. However, other people want to verify that DR is prescribing the best program or possibly make their own program.

I think it is important to acknowledge that many people manage their money poorly, either because of a lack of knowledge or inability to stick to their own plans, and those people should stop trying to second-guess a comprehensive program and just go with it. DR’s program is a great starting point, and there’s little harm in finding some early success with it and re-evaluating when in a stronger position. Making some progress on an imperfect, general program is better than spinning your wheels on an individualized one.

If you desire to make the tough calls about how to prioritize your debt payments and saving, are capable of sticking to the plan you make, and want to maximize net worth, I think that attempting to sick to DR’s plan exactly will not be the best fit for you; you will be better off modifying the Baby Steps or creating your own plan. I do still recommend listening to DR’s radio program for motivation, though!

You Believe Debt Is Pretty Much the Worst Thing Ever

The Baby Steps prioritize paying of all non-mortgage debt over saving anything other than a starter emergency fund, regardless of interest rate. DR does not think that there is any such thing as “good debt” or that debt can be used as leverage. He advocates cutting up your credit cards even if you never carry a balance. He has the most extreme view of debt possible (save for the mortgage on your primary home), and it shows in the Baby Steps. The rationale for this position comes from his personal experience with bankruptcy and a number of Bible verses, chiefly Proverbs 22:7b “The borrower is slave to the lender.”

You must agree that your debt repayment is your priority or else DR’s program is a non-starter. If you have debt you consider “good” that you want to pay off slowly or you have a loan at a very low interest rate (I know lots of people with car loans under 1%!), you won’t have that option with the Baby Steps without modifying them. DR does not care about the financial environment at any given time – like that we can currently borrow for almost nothing while the stock market has returned over 20% – he just wants your debt killed. DR’s program is perfect for someone who has an uneasy feeling while in debt and is motivated by that to become debt-free.

Your Psychology Dominates the Math

There are two psychological principles that DR’s program embraces: early wins and singlemindedness.

The reason that DR recommends the debt snowball method (paying the smallest balance debt first) over the debt avalanche method (paying the highest interest rate first) is that he believes that getting a fast win at the start of the process will encourage you to continue and try even harder to pay off debt quickly. It has been empirically shown that the debt snowball method results in faster debt payment than the debt avalanche method on average, although if carried out using the exact same amount of money for the debt payoff the debt avalanche method would be faster. Seeing the quick first win and how the amount of money available to throw at each debt grows as the snowball rolls inspires people to devote even more energy to the process – even though the debt balances are larger as you progress through it, they also seem to reduce faster because the amount you put toward the debt each month grows.

The Baby Steps are also constructed so that you only have to focus on only one aspect of your finances at a time. You are supposed to complete steps 1-3 (debt payoff and saving an emergency fund) to the exclusion of all other financial goals. Steps 4 and 5 are long-term savings and you just have to set up the rates and move on to step 6, paying off your mortgage. So you don’t save at all for the long-term while you’re paying off debt, and only after you have your retirement and children’s college savings set up are you permitted to pay extra on your mortgage. This clears away the difficulty of deciding what to prioritize and the associated hesitation in carrying out the decision. At every step you know exactly where your brainpower needs to go and everything else either doesn’t matter or is on autopilot.

If you are motivated by an early win and struggle with multitasking effectively, Dave Ramsey’s program is a great choice for you. But if you are more motivated by strict net worth increases, you would likely want to avalanche your debt and prioritize resuming saving over paying off your lowest-interest debt.

You Will Be Gazelle Intense

One of the aspects of DR’s plan that scares people is that he recommends stopping retirement contributions, even forgoing an employer match, during the non-mortgage debt repayment period. This goes along with the previous assumption that it is better to have only one ball in play at a time.

DR boasts that the typical person undertaking his program will pay off all non-mortgage debt in about three years and their home in about seven years. Putting off saving for retirement for a small number of years while you aggressively pay off debt and then hitting a 15% savings rate immediately after might not result in quite as high a net worth as if you saved while paying off debt (depending on the interest rates), but it’s also not a net worth killer.

What is a net worth killer is doing the first half but not the second – stopping retirement contributions but failing to pay off debt rapidly. For DR’s plan to work better than or as well as one that promotes saving while paying down debt, it is imperative that you become “gazelle intense,” as DR puts it, about increasing your income and decreasing your spending to free up as much money as possible to devote to debt reduction. Gazelle intense refers to a lion chasing a gazelle – the lion is running for its next meal, but the gazelle is running for its life.

DR assumes that you will be gazelle intense about your finances until your debt is repaid, and if you aren’t ready to commit to that level of intensity, his program has the potential to be more harmful than helpful. But if you listen to DR for a while and internalize his “beans and rice, rice and beans” and “you don’t see the inside of a restaurant unless you’re working there” catchphrases, you can move yourself closer to that gazelle intensity.

If you agree with each of these four principles, you will likely enjoy and succeed with DR’s program. If you disagree with any of them, it may be possible to modify the Baby Steps to suit your individual temperament (more on that in the next two posts) or you may be better off charting a different course to achieve your goals.

Which of these principles are you in agreement with and which are you not? Do you think there are any more pillars on which DR’s program is built? How have you motivated yourself to be gazelle intense about debt repayment or saving?

I am not sure how I feel about a lot of those points. There are many good points in his program, but putting off retirement saving for seven years or more, because most people will slip on a journey that long, just seems like a bad choice. I do really like that his first step is to get a Baby Emergency Fund though.Alicia @ Financial Diffraction recently posted..Emergency Fund vs Debt Repayment.

On average, the retirement savings pause would only be 3 years because you would resume that before paying off the mortgage. Sorry I wasn’t totally clear about that – more in next week’s post! But for some, the retirement savings delay could be quite a bit longer and that gets dicey, especially if the remaining debt is low-interest.

I suspect that the baby step that you are in is a strong indication of whether or not DR’s plan is for you. If you’d be starting in step 1 (consumer debt + less than $1K in the bank), you’ve lost all credibility to manage your own finances in my opinion. You need something to follow, and DR has the potential to ‘change your family tree’. If however, you stumble across DR when you’re already past step 3 (no consumer debt and 3-6 months of expenses in the bank), you’re probably better off taking an active roll in individualizing your financial plan– (maybe that 30 yr fixed mortgage at 4% isn’t so bad after all? How about picking a mix of low-cost ETFs instead of managed funds?)

That’s a very good point. Dave Ramsey is more well-known for debt reduction so I would hope that most people getting on the program are joining in Baby Step 1 or 2. However, he is also popular in Christian circles (particularly in the Midwest). I’ll be returning to you final points in the last post for sure!

I think you summed up the core assumptions very well. Basically if you don’t want/like to think, and like be told what to do, then his program fits well. The reason he is successful is that this fits most people – they don’t want to think about their future, or make decisions, but just want to be taken care of.

Herding these people in a decent financial direction has value to each individual, but teaching them to think would be far more valuable to each individual (just a lot harder and less popular which equals less $ opportunity for the teacher). So is Medium Value * lots of People > High Value * smaller set of People? PF community is very much on the teaching people to think side, hence why there are few straight up DR followers here and a lot less $ to be made.

I have thought about taking a DR course just to get more familiar with what he teaches, but I am partially afraid that I would negatively affect other people taking actions because I would likely raise “questions” that could deter others from taking action because the path wouldn’t be as “clear”. I guess I could just shut up and listen 😉

I didn’t want to put it quite so harshly but I generally agree with your assessment. 🙂 But there are some people who are thoughtful and just know themselves well enough to admit that their psychology influences them more than spreadsheets. I like your point about what is the money-making approach, too… More directive programs do seem popular in terms of books and the media.

I was pretty much like that during FPU but I read my table and I think it went over OK. Our leader was also a little heretical. Overall I think people were honest. Thankfully we did all of our discussions at our tables so the entire group wasn’t derailed/distracted by snarky questions. 😉

FYI – I am still reading, just switched to Feedly for reading most of my blogs. But that means that commenting is an extra step :-/ so my commenting has definitely dropped off. You would think that in-line comments from a reader would be a key feature, but apparently not??

One other thought i had thinking about this: I think there is another way to divide people when it comes to dealing with PF /Debt . . : Ignorant/Discouraged/Prideful . So i think DR primarily targets though who are discouraged with their current situation (need physiological rewards for encouragement and action) and want prescriptions for how to fix it or those who have been “prideful” and need to be set straight. Those who are “ignorant” would fall into 2 categories – those who again want just a prescription, and then the ignorant thinkers who would benefit from more “teaching” rather than prescription. Most in the PF community would have been in the ignorant thinkers at some point regarding PF right?? It is just clear that they were willing to go beyond prescriptions for their life and move to trying to make their own decisions. Hard to fit everyone into boxes, but sometimes helps to think about generalizations 🙂 These groups by the way came from an interesting discussion i read on how Jesus responded to different people in very different ways: he taught the ignorant, encouraged the discouraged, and confronted the prideful.

That’s an interesting framework to try to apply. I agree that DR is best suited for people who are overwhelmed by their debt or feeling discouraged, and possibly also ignorant. Yes, most in the PF community have been ignorant or discouraged or both at some point and have moved beyond the prescription phase (like Done By Forty above).

That’s a pretty insightful summary of Ramsey’s method. I know he has a bad rep among personal finance bloggers, but Dave got us started so we’ll always have a soft spot for him. Like you noted, the evidence is that the debt snowball is a superior method in practice, even though it’s inferior on paper. As behavioral economics tells us, we are not homo-economicus, and ought to take our behavioral quirks into account when dealing with personal finance.

All that said, I can’t listen to Dave’s show anymore. I love the guy but can’t take his attacks on credit card companies, the government, or anyone who tries to modify the program to suit their personality. It’s too myopic.Done by Forty recently posted..Notes from Peru & Ecuador…With Pictures!

I’m glad your gratefulness to DR for getting you started on your financial journey didn’t prevent you from seeking out other sources of information. The debt payment part of the program is quite effective if you stick with it!

I don’t agree with most of DR’s views but I still love his show! I actually am in a bit of a liberal bubble locally so I don’t mind the conservative exposure.

I’ve not really been exposed much to Dave Ramsey, other than what others mention in posts and the like. But I do have a very similar idea/approach with his view on credit. I don’t like have debt, and I always pay off my credit card (yes I have one, because I can’t really see a practical alternative, and I’m responsible, so why bother). I can’t imagine getting a car loan (I’d save up for one first), and my student loans were small, and I paid them off as quick as I could.

I feel a little uncomfortable with the idea of stopping retirement savings, and I’m thankful that in Australia it is a non negotiable, if you work, some of your salary goes to retirement. Saves people making other decisions like paying off their house.

I definitely see the inside of restaurants, and I’m not working, so I’m sure that’s in opposition to his gazelle intensity, but then I only have a home loan debt, so I feel like I’m doing ok. It’d be interesting to see what he thinks of how people manage money who are outside his underlying assumptions (high non house debt, poor use of credit, no savings)SarahN recently posted..Thanksgiving – Aussie style

I think the biggest problem I had with DR was the “once you have $1000 in the bank, use the rest of your money to pay off all your debt”. At the time I went through his series, I was sitting on about $10K in savings and $7K in debt. I did not drain my savings to pay it off, but it was ultimately a good decision. Shortly after the series I was out of work and used my savings to keep the household afloat (the mortgage company does not take Visa…)

I would definitely say that if you view yourself to be in a tenuous employment situation you shouldn’t drain your EF to $1k. How much you want your normal EF to be also plays into how much of your savings you feel comfortable devoting to debt repayment. But sometimes stuff just happens and you can’t predict it!

People definitely balk at that recommendation! My entire table felt that way, at least at first. And your example perfectly illustrates the danger of following that step. We hope that most people won’t encounter that large emergency right after starting the Baby Steps, but some do, and they get doubly screwed.

Good summary of DR’s get out of debt program. I don’t have any problems with his program that is meant to help many people who do not understand finances and got into debt due to their lack of understanding. I do have a big problem with his investment advice, that usually involves using one of his paid service providers who will put you into loaded high-cost active mutual funds, and his statements that you can earn 12% per year by investing in “high growth mutual funds.” I am all for people getting out of debt, and DR’s program is great for that, just don’t listen to his investment advice.Bryce @ Save and Conquer recently posted..Gas Clothes Dryer Repair

There is no such thing as good debt. Imagine losing your job (and many people did), getting very sick, barely being able to cover the medical expenses), facing deaths in the family. Life is not a nicely run story, you get hit in the teeth when you least expect it. Having debt TIES you to the bank/a bad job etc. I’ve been through many of the ‘surprises’ before and being into debt was HORRIBLE.

So, I do believe that getting off debt should be the main focus (together with getting an emergency fund together, since disasters won’t wait for you to be ready). Only after you’ve been on the other side (debt free), you’ll truly appreciate how nice life can be, when you make your OWN plans each month, can save, invest, move to another city/country, stop going to a crappy job, try starting your own business etc. Most of these opportunities are not for people who are into debt, because any bad month can really mess up with their money and it will be tough to recover.

I’ve been into more serious debt for 4 years only and it was a horrible experience.

It’s true that Ramsey’s plan might not work for all, but it does make sense: get some EF money aside, so that you’re not getting into more debt, and then start paying off the money you owe and be consistent with it. Everyone can tweak the programs to their needs, but the main thing remains: pay off the debt, you’ll be so much better afterward.dojo recently posted..Personal finance book: The Millionaire Next Door

I appreciate your stance, but I don’t have the same kind of visceral reaction to debt. The debt I’ve had has been easily managed – but I also didn’t have emergencies during that time. I think that we should all just be focused on increasing net worth, and if that’s paying down debt that’s great, but savings are more or less as good.

Truth be told most of us don’t have the discipline or wherewithal to follow complicated strategies and plans…we get swamped. DR’s baby steps on the other hand offer a simplicity and directness that most people can comfortably follow. There are steps and each is clear and leads you to a particular point in the financial journey. I like that he exploits psychology to make the program palatable and doable for most – small wins (greater motivation). Single task(you have no excuse not to focus!)Simon @ Modest Money recently posted..LearnVest Review – Exclusive Review of LearnVest

We first encountered Dave Ramsey two years ago and his basic principles are indeed sound. However I think one of the things I don’t love about him is that he doesn’t get people into their retirement savings nearly as soon as they should. We have been kicking tail on our student loan debts but also saving for retirement. I also think that Dave Ramsey doesn’t focus nearly enough on the generosity aspect of your personal finances. He brings it up once you have everything together, but as a Christian personal finance guru I would love to hear him talk about generosity in every step of the process.Jon@2-copper-coins.com recently posted..GRAND Update – It’s Almost Christmas Vacation!

I’m glad to hear you’re successful in saving for the long-term while paying down debt! What convinced you to start saving as well?

I appreciate that DR talks about generosity as much as he does. It’s quite a thorny issue given that much of his audience is struggling to keep their heads above water. It’s clear that giving is a priority for him personally, but you’re right that most conversations go by without it coming up.

Honestly I was watching PBS one Saturday and there was a wall street guru on who was bemoaning how late people were beginning to start their retirement savings. The only line I can remember from the program was “time is your greatest asset as an investor, not money.” That was the clincher for me to get going and pay off debt while saving for retirement.

I think that if you were to talk to Dave Ramsey personally he would say “generosity is important every step of the way.” Yet in much of his programming that doesn’t come through. I also think that the psychological benefits of being generous can be motivators to get out of debt. When you have something to give, that is an empowering feeling.Jon@2-copper-coins.com recently posted..Dealing with Christmas Stress? Time to Say No!

Well, the thing about interest rates is that they cut both ways. I agree that time is a great asset, but you’re choosing between having more time for rates to work in your favor (probably) toward retirement and having less time to pay interest on your debts (definitely). So to me it comes down to an interest rate question, as I’ll discuss in the next two posts in this series.

Very good point about how being a giver imparts psychological benefits!

That is quite an unusual suggestion and not one I’ve heard him make! DR is actually quite protective of existing retirement account balances, even though he discourages contributing more until step 4, and it’s because of the high early withdrawal penalties as well as (I suspect) the time value of money issue. In all the times I’ve heard him talk people OUT of making withdrawals from their 401(k)s/IRAs, the exception was to save a home from foreclosure. Perhaps that was the situation you heard?

[…] very well for some people but may be inappropriate for those who don’t agree with all of the underlying principles. The next two posts are intended for people are curious about following the Baby Steps loosely […]

[…] approach. It makes the decisions very simple for the participant in the plan, which is one of the underlying principles – they don’t have to analyze the overall financial climate to make decisions about debt and […]